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Collections of Value Investing articles, interviews and videos, especially on Warren Buffett and Charlie Munger and articles from various disciplines to build "Latticework of Mental Models"

Wednesday, July 26, 2006

Shares of Amazon plunged over 20% today as it announced a 58% profit decline. This is equivalent to a loss of about $2.8B in market value in less than 24 hours. Amazon share is currently trading at 3 years low.

So, does this come as a surprise?No. Not for me at least.

Why?From a quick glance from Yahoo, Amazon is overvalued. Most value investors would avoid Amazon, except for Bill Miller.

Is it a good buy now after this "myocardial infarction-inducing" drop?No, not in my opinion. It is still richly valued. The share has to slide further to entice me.

Is Amazon a Good Company?Yes, without doubt, Amazon is a great company. I buy all my books from Amazon. Not only does Amazon sell cheaper books, but it offers free delivery too! Amazon has never disappointed me since I started using its service more than 5 years ago. Even Warren Buffett buys books from Amazon!

ROA (ttm): 10.39%ROE (ttm): 409.88%

Conclusion:Warren Buffett said, “It is more important to say "no" to an opportunity, than to say "yes"."Happy investing,Dah Hui Lau (David)

Opportunity Cost"There is this company in an emerging market that was presented to Warren. His response was, 'I don't feel more comfortable buying that than I do of adding to Wells Fargo.' He was using that as his opportunity cost. No one can tell me why I shouldn't buy more Wells Fargo. Warren is scanning the world trying to get his opportunity cost as high as he can so that his individual decisions are better."

When you are evaluating any investment, you must compare it to every other available investment, including ones you may already own. Instead, many investors collect stocks like baseball cards and the resulting portfolio bloat will likely not increase returns or reduce risk. So when you hear about the new hot stock in the next can't-miss sector, ask yourself two questions: (1) Do I understand the investment as well or better than one I already own? (2) Is the risk and reward profile of the investment superior to all other alternatives? If the answer is "no" to either questions, it is probably best to stay away.

Rationality"Rationality is not just something you do so that you can make more money, it is a binding principle. Rationality is a really good idea. You must avoid the nonsense that is conventional in one's own time. It requires developing systems of thought that improve your batting average over time."

Munger is an evangelist for the virtues of rationality and his outstanding investment record is testimony to a lifetime of disciplined thought. To succeed as an investor, one has to make good decisions that are anchored in reality and free from emotional and cognitive distractions. At GrowthInvestor, we are searching for companies with significant market potential, rising demand, an economic moat, and growth-oriented management for purchase in the portfolio. This is not merely a checklist, but a research process focused on helping us make the most-rational decisions. If we make enough rational decisions, we will eventually have the returns to show for it.

Envy"Harvard and Yale concentrated with venture capitalists that got the best calls and brainpower. Very few firms made most of the money, and they made it in just a few periods. Everyone else returned between mediocre and lousy. When returns happened, envy rippled through institutional money management. The amount invested in venture capital went up 10 times post-1999. That later money was lost very quickly. It will happen again. I don't know anyone who successfully resists this stuff. It becomes a new orthodoxy."

Munger and Buffett often say that envy is worst of the seven deadly sins because it is the only one that isn't fun to commit. When a group of people make money, others are compelled by an irresistible force to get a piece of the action, even though prices have risen so far above fair value as to guarantee disappointing returns and there are much better alternatives available. I am completely puzzled by this behavior, but I am also glad it exists.

Learning"We all are learning, modifying, or destroying ideas all the time. Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side. If you can't state arguments against what you believe better than your detractors, you don't know enough."

Carl Jacobi, a noted 19th-century mathematician, counseled his students to "invert, always invert" when they encountered a particularly vexing problem. I think this is a great way to approach investing. After you compile all the reasons you should buy a stock, invert the question and state the reasons why you should not buy the stock. By doing this, you ensure that your research process is more complete.

Mistakes"Chris Davis ]of the Davis funds[ has a temple of shame. He celebrates the things they did that lost them a lot of money. What is also needed is a temple of shame squared for things you didn't do that would have made you rich. Forgetting your mistakes is a terrible error if you are trying to improve your cognition. Reality doesn't remind you. Why not celebrate stupidities in both categories?"

I have kept track of my investing mistakes for some time now, and it is a painful, but illuminating, experience. Without doubt, I am a better investor for it. I will be keeping track of our mistakes at GrowthInvestor, and I suggest you do the same with your portfolio. With a post-mortem catalog of your mistakes, you will be able to identify patterns in your decision-making process that produce unforced errors.

Risk"I know a man named John Arriaga. After he graduated from Stanford, he started to develop properties around Stanford. There was no better time to do it then when he did. Rents have gone up and up. Normal developers would borrow and borrow. What John did was gradually pay off his debt, so when the crash came and 3 million of his 15 million square feet of buildings went vacant, he didn't bat an eyebrow. The man deliberately took risk out of his life, and he was glad not to have leverage. There is a lot to be said that when the world is going crazy, to put yourself in a position where you take risk off the table. We might all consider imitating John."

Friday, July 21, 2006

Since engineering the combination of Sears and Kmart last year, billionaire Edward Lampert has tried to convince investors that he intends to run the new company as a retailer.

Wall Street, for the most part, has turned a deaf ear, betting that Lampert will turn Sears Holdings Corp.'s massive real estate holdings into cash.

Perhaps he will, eventually. But one prominent real estate investor isn't waiting around to find out.

Michael H. Winer, portfolio manager of Third Avenue Real Estate Value Fund, cut his fund's Sears stake roughly by half in the quarter ended April 30 and expects to liquidate the rest of the holdings in January, according to Third Avenue's second-quarter letter to shareholders mailed in June. He sold 250,000 shares worth roughly $35 million.

The reason: a combination of an "attractive price"--about $140 a share; a fourteenfold increase from what the fund paid for them--and "our view that the company should be valued as a going concern, as opposed to the theoretical liquidation value," Winer wrote.

Thursday, July 20, 2006

In May 2006, I recommended buying Dell as it is such an attractive company. Since recommending Dell at $25.20, Dell's share price has skidded lower to $22.12. As I have been expecting, superinvestors started investing more in Dell.

Wallace Weitz, a superinvestor, from Omaha started buying Dell too! This is what Weitz said about Dell......

"Dell is a new position for us (and one likely to raise eyebrows among our investors). We generally avoid technology stocks because of their very short product cycles and unpredictable future free cash flows, but we do not think Dell is a typical tech stock. Dell markets directly to consumers and assembles computers, monitors, printers and other hardware to order. As a result, it takes very little inventory risk and can change its product offerings on short notice."

"In recent quarters, Dell has faced improved competition from Hewlett Packard and others and has created problems for itself by skimping on telephone tech support for its customers. As a result, sales have slowed, margins have slipped and the company’s cost advantage over its competitors has narrowed. We believe Dell has addressed these problems and that its cost structure, balance sheet, returns on investment and strong management provide the company with significant and sustainable competitive advantages. The company generates prodigious amounts of cash and is currently deploying it in a massive stock buyback program. We believe the company is worth considerably more than the current price of $24."

A few weeks ago, I posted my analysis on PartyGaming. I like this company a lot, but my main worry is the legislation. Now, as the CEO of BetonSports been detained in USA with regards to illegal online sports gambling, all the online gambling companies including PartyGaming have taken great beatings. All their shares plunged over 20% in 2 days "slaughter".

As valueinvestor, we should take this opportunity to re-investigate the attractiveness of online gambling more closely. This may present a great buying opportunity.

My conclusion is that PartyGaming is an exciting company that generates huge amount of free cash flow, and is a great leader in online gambling world. However, I'm not smart enough to understand how the legislation going to play out in the next few years.

Monday, July 17, 2006

Jain, who was born in India and holds a master's in business administration from Harvard University in Cambridge, Massachusetts, has been on investors' lists of potential successors the longest, says Tom Russo, a partner at Gardner Russo & Gardner in Lancaster, Pennsylvania.

Jain specializes in so-called mega-catastrophe coverage, taking on risks rivals shun. He insured Chicago's Sears Tower, North America's tallest building; the 2002 Winter Olympics in Salt Lake City after the terrorist attacks on Sept. 11, 2001; slugger Alex Rodriguez's health after he signed the biggest contract in Major League Baseball history in 2000 at $252 million over 10 years; and a sweepstakes by Purchase, New York-based PepsiCo Inc. in which a contestant had a chance to win $1 billion.

Monday, July 10, 2006

Warren Buffett stunned the world when he announced he was giving hisfortune to the Bill and Melinda Gates Foundation. Charlie Rose is theonly broadcast journalist with access to Buffett and Gates on theirfriendship which resulted in this historic announcement.

We begin a three part series about Warren Buffett on Monday night witha look at the man. Tuesday night, we look at the business and thephilosophy that created his wealth. We conclude on Wednesday with alook at his friendship with Bill Gates, which led to the combining oftheir vast fortunes.

Saturday, July 08, 2006

In trying to fully grasp the magnitude of your generous gift I have come to partially understand something rather profound. The money we earn to pay our housing and daily needs is currency, currency that can be counted. The money we make beyond our expenses is energy, energy that can be used to improve health conditions, energy that can be used to conduct medical research, energy that can be used to educate the people who need education the most, like politicians.

Choosing the Gates Foundation as a means to best distribute that energy makes me suppose you put just as much thought into how best to spend it as you did into how to make it. Effectively, you have turned the popular bumper sticker, "He who dies with the most toys wins," on its head.

You have given America a moment of pride, Mr. Buffett, a moment of faith. Heck, in the shadow of your generosity I have decided to ignore the hot dog eating contest televised on the 4th of July as the sign of a declining society. Not only have you literally saved the day for many people world-wide, but you have brightened a day for America.

Friday, July 07, 2006

Nygren dubs these stocks "fallen angels." He named ten that fit the profile: Citigroup (C), Dell (DELL), Harley-Davidson (HDI), Hewlett-Packard (HPQ), Home Depot (HD), Kohl's (KSS), Texas Instruments (TXN), Time Warner (TWX), Tyco (TYC) and Wal-Mart (WMT). Nygren thinks these companies will achieve long-term earnings growth that will significantly exceed the earnings growth of companies in Standard & Poor's 500-stock index and that the market will recognize that growth in the form of high stock prices in the future.

Bill Miller, whose $19 billion Legg Mason Value Trust has beaten the Standard & Poor's 500 index for 15 straight years, said the biggest U.S. companies are ripe for investment because they have slumped over five years. Miller, 56, said he recently bought shares of American International Group Inc., the world's biggest insurer, and General Electric Co., the world's No. 2 company by market value. He's also bought shares in Citigroup Inc., the largest U.S. bank, and Home Depot Inc., the world's largest home improvement retailer.

``You look and see what has done worst over the past five years, and the worst has been megacaps,'' Miller said yesterday in an interview at the Fund Forum conference in Monaco. ``We know it's mathematically impossible for them not to outperform at some stage.''

Shares in General Electric, AIG and Home Depot have all fallen at least 20 percent in the past five years while Citigroup's stock gained 4.3 percent. Over the same period, the S&P 500 Index rose 7 percent and the Russell 2000 Index of smaller U.S. companies surged 49 percent.

Those companies have an average market value of $204 billion while the average for the S&P 500 Index is $23.5 billion. Miller didn't give exact dates when he bought the shares.